Risk-on rebound: Oil slides, Tields ease, and growth names come roaring back

Well, that didn’t take long. Less than 24 hrs after the traders and algos threw a fit over Kevy Warsh’s rate hike and hawkish message, investors came storming back into the market. Stocks and bonds rallied together in a ‘risk on’ reaction as falling oil prices helped ease the inflation anxiety.

At 4 pm – here is what the scoreboard looked like – the Dow added 316 pts or 0.6%, the S&P added 85 pts or 1.1%, the Nasdaq surged by 440 pts or 1.7%, the Russell added 15 pts or 0.6%, the Transports gained 108 pts or 0.6%, the Equal Weight S&P added 45 pts or 0.5% while the Mag 7 surged by 635 pts or 1.8%.

Technology led the charge, gaining 2.2%, while the semiconductor index surged 3.1%, Disruptive Tech added 4.5%, Software was up 0.8%, Cybersecurity gained 1.4%, Memory names were up 4.4% while Quantum names gained 8+%. The Growth trade gained 1.5% while the Value trade gained 0.6%.

Besides technology – we saw Consumer Discretionary names gain 1.1%, Utilities up 0.9%, Energy up 0.7%, Healthcare & Basic Materials both gained 0.6%, Real Estate up 0.3%, with Consumer Staples and Industrials up 0.2%.

Only two S&P sectors ended the day lower – Financials and Communications down 0.1% and 0.6% respectively.

And so, what caused all the excitement? Oil…. Why? Because both WTI and Brent got sold and not because peace broke out in the Middle East, but because the Saudis convinced everyone that they have everything under control and the damage done to the pipeline will not create a supply catastrophe. (see yesterday’s note).

In addition – savvy traders that rode the wave higher, also decided to hit the sell button to lock in some of those profits. But let’s be clear, oil is still above $100 and the conflict in the middle east is not over – period.

This morning WTI is down again – currently down 0.8% at $101.10. Now, if you look at the chart – we could see oil fall to the $91 level before it finds support – and that would help fire up the troops.

And now – let’s discuss the bond market because that also helped the mood….……and because that’s important as well. Yesterday saw the 10-yr Treasury yield - which finished Wednesday at 5.02% -finish Thursday at 4.95%, snapping an eight-day move higher and allowing investors to breathe a small sigh of relief.

But let’s be clear: 4.95% is still well within the danger zone. It continues to pressure stock valuations, mortgage rates, housing affordability and corporate borrowing costs. Unless we see yields move meaningfully lower—and remain there - I’m not convinced Thursday’s “feel-good” mood can last.

So, what could send the 10-year surging back above 5%?

A renewed spike in oil would be the most immediate catalyst – Why? Because inflation expectations would jump and bonds would sell off and that would send yields up.

Stronger economic data could do it as well. If industrial production, manufacturing activity, employment or consumer spending remain hotter than expected, investors may decide that the economy CAN tolerate additional Fed hikes. That would push expectations for the terminal rate higher and put renewed pressure on Treasuries. (The terminal rate is the rate that the federal funds rate will reach before the FED stops hiking, pauses or cuts).

Then there is supply issue. Next week, the Treasury comes to market with $69 billion of 2-year notes (currently yielding 4.67%) on Tuesday, $70 billion of 5-year notes (currently yielding 4.78%) on Wednesday and $44 billion of 7-year notes (currently yielding 4.85%) on Thursday - that is a combined $183 billion of issuance that will surely test investor appetite. Now, strong demand will push yields down, but if buyers demand a higher yield or dealers are left holding too much inventory, we could see the 10 yr kiss and penetrate 5%.

Ok – to be fair – what could push them lower?

Oil would need to continue to decline, inflation data would need to cool, and economic activity would need to soften - but not collapse. We would also need to see strong demand at upcoming Treasury auctions and some indication that Wednesday’s rate hike was enough for now.

A weaker labor market or disappointing production data would also cause investors to put money into Treasuries and that would also pull yields lower. And, finally, any significant geopolitical escalation that creates a true ‘risk-off’ reaction – could see money move into treasuries and that would send yields down.

Again, if you look at the chart - If yields break below 4.9%, then we could see a 4.8% yield fairly quickly…..and if that happens – we can expect stocks will rally. Conversely, if the 10-yr pushes back up and through 5% and remains there, all bets are off.

Gold rallied by 1.9% to end the day at $4,340 taking it up and thru intermediate term trendline resistance. This morning it is up $20 at $4,360 leaving it now in the $4,320/$4,540 trading range.

And the VIX – Fear index – it plunged by 13% to end the day at 15.44 – ending below all 3 trendlines putting it firmly in the complacent zone. It is essentially saying – ‘there is nothing to see here’ – which is exactly why you need to stay awake.

And then there is the latest eco data to consider – because yesterdays mixed eco data also deserves attention. Weekly jobless claims fell to 196,000 versus the 208,000 estimate, suggesting that the labor market remains resilient. Housing told a very different story. Overall housing starts fell 2.6% in August vs. the expected increase of 6.7%. Building permits – which points at ‘future demand’ also disappointed – falling 2.7% vs. the expected loss of 1.5%. But there is some nuance to that. Single family starts rose by 7.6%, while multifamily starts fell by 22.5%.

Builders are struggling with higher financing costs, higher material costs and labor shortages. In addition, 30 yr mortgages are kissing 7%, which makes affordability less ‘affordable’, so builders are having to offer all kinds of upgrades for ‘free’ in order to sell the homes. In the end – bad news for housing and the decline in oil helped to push bond prices up and yields down and that dynamic helped fuel the rally in stocks and especially the high growth ‘sexy’ tech names.

Eco data today includes - August industrial production – expected to be +0.3%, manufacturing production – expected to be +0.3% and capacity utilization – expectation of 76.4%. These reports will tell us whether the productive side of the economy is maintaining momentum - or beginning to feel the pressure from higher borrowing costs, tariffs, elevated energy prices and tighter financial conditions.

Here is how you need to think about it - strong production data would reinforce the argument that the economy can absorb Wednesday’s rate hike—but it could also push bond yields higher – refer back to the section - What could cause yields to surge?

Weak data on the other hand could raise concerns about a weakening economy - Again refer back to the section – What could cause yields to decline?

European markets are all lower all down about 0.75% across the board.

US futures are trying to figure it out…. Dow futures are up 16 pts, S&P’s up 10, the Nasdaq is up 108 pts, while the Russell is down 2 pts.

Markets are trying to put a positive finish on a turbulent week. 3 straight days of lower oil have helped to calm inflation fears and that has helped improve the overall tone. But let’s not confuse ‘calmer’ with calm. Brent and WTI remain above $100 and that will keep the inflation story alive. Iran remains the antagonist in the story and appears to have no interest in making a deal until after the mid-terms – hoping that their unwillingness to come to the table neuters Trump at the ballot box. Meanwhile, the 10-yr yield is at 4.96% - reminding us that the bond market is not going to take a back seat. Gold is pushing back toward $4,400 in what I think is a ‘safety trade’ and the VIX at 15.35 is suggesting everything is good in the world.

Today is both quadruple witching and an S&P rebalancing day. That means enormous volume - especially at the opening and closing bells - BUT it does NOT mean anything fundamentally has changed – it’s all a bookkeeping trade, so do not over analyze it. Period.

The S&P closed yesterday at 7,637 - up 85 pts. We are now on the north side of the trendline – so 7,615 which was resistance becomes support. Futures are suggesting we will churn on the opening and then figure it out. Yes, yesterday was a good day, but was it the beginning of a broader move or just another dead cat bounce? Today’s eco data will give us one more piece in the puzzle – but in the end, until we get geo-political clarity, I expect the volatility will continue.

Linguine puttanesca

This dish is a classic….and originated in Naples and is today a staple of the Neapolitan household.  It is made from tomatoes, black olives (or Kalamata Olives), capers, anchovies, onions, garlic, oregano, and parsley.  It is easy to make and has an interesting history.  It is spicy, tangy, and vibrant – an appropriate description of the mkt today…